Many individuals will ask how much debt is too much debt. Well, I will give you the classic lawyer’s answer, in that it depends. The debt to asset levels will vary depending upon enterprise, repayment capacity, profitability, track record, management and, above all else, character.
50% Debt to Asset Levels
Let us provide some guidelines concerning debt levels that are reaching the extremes. Grain, row crop and cow and calf producers generally service less debt. In the last few years, debt to asset levels exceeding 50% were a common denominator for problem credit for these types of enterprises. Many might say we are on a new plateau concerning commodity prices. Yes, however cost of inputs, rents and land have increased, leaving a margin to service that debt similar to the past.
70% Debt to Asset Levels
Dairy, hog, poultry and feedlot operators, along with young and/or beginning farmers and ranchers, will see these debt to asset levels as high as 70% or slightly more. In these cases, superior management and working capital management are not an option but a requirement. Higher debt levels are expected for younger farmers. For these cases, a government guarantee, personal, or co-signors can be a necessity to overcome the debt risk seen here. A business plan that is executed along with a sound marketing and risk management program can be valuable in obtaining credit.
Editor’s note: Dave Kohl, The Corn And Soybean Digest Trends Editor, is an ag economist specializing in business management and ag finance. He recently retired from Virginia Tech, but continues to conduct applied research and travel extensively in the U.S. and Canada, teaching ag and banking seminars and speaking to producer and agribusiness groups. He can be reached at [email protected].